Investment dealers must avoid taking sides in contested director elections, and must do more than simply provide disclosure about their involvement in other sorts of proxy contests, securities regulators say.

The Investment Industry Regulatory Organization of Canada (IIROC) published new guidance on Thursday that focuses on the conflicts of interest that arise when brokerage firms are paid to solicit shareholder votes.

Among other things, the guidance indicated that the conflict created when a dealer is paid to solicit votes in a director election — where the firm is paid only for votes in favour of one side, or paid only if a particular side is successful — is unmanageable.

“In these cases, it is unlikely that the dealer would be able to provide objective advice in light of the fee arrangement and the nature of the information made available in a contested director situation,” IIROC said in its guidance, which noted that these kinds of conflicts must, therefore, be avoided.

Other sorts of shareholder votes, such as a vote on a proposed merger deal, are different, the guidance noted. In the case of competing M&A proposals, there’s more objective information available to investors to help make their decision.

While paying dealers to solicit votes in other situations may give rise to conflicts that can be managed, the guidance suggested that this will be very specific to the details of each case.

And, IIROC indicated that disclosure won’t be enough to manage the conflict.

“Where a dealer determines that it is appropriate to address the conflicts… rather than avoid it, disclosure alone is in our view a generally inadequate mechanism because of its limited, and sometimes contradictory, impact on the client’s decision-making process,” it said.

In these cases, dealers must also identify how to address the conflict “in the best interest of the client,” it said.

The new guidance follows consultations by both IIROC and the Canadian Securities Administrators (CSA) involving their concerns about conflicts created by these kinds of “soliciting dealer arrangements.”

IIROC’s guidance noted that dealers must also be aware of complying with CSA rules in this area, such as the proxy solicitation rules.

“Today’s guidance provides our dealers with greater clarity about the circumstances where conflicts of interest associated with soliciting dealer arrangements can be managed or should be avoided,” said Irene Winel, senior vice-president, member regulation and strategy at IIROC.

“We welcome IIROC’s guidance,” added Louis Morisset, chair of the CSA and president and CEO of the Autorité des marchés financiers (AMF). “We’re pleased with the collaborative work carried out by IIROC and the CSA under this initiative.”